A tax investigation can lead to substantial accountancy fees even if there is no additional tax to pay at the end of the process, however, Tax Investigation Insurance will cover the cost, explains FPM Associate Director Ciara Reilly.
It is likely we will see more tax investigations in the coming months as HMRC attempts to close the enormous gap in public finances. For businesses and individuals who are the subject of these investigations, presenting a strong defence can involve significant accountancy fees, even if at the end of the process no additional tax is due. The advantage of having tax investigation insurance is that covering these costs provides peace of mind at a stressful time.
Covid-19 Impact on Tax investigations
To date, the Covid-19 pandemic has cost the UK Government approximately £300 billion. Employers have placed around 8.7 million employees on furlough and circa 2.5 million self-employed individuals have received state support to offset income lost due to the pandemic.
In April 2020, most HMRC investigations were suspended to allow HMRC staff to administer the furlough scheme and deal with taxpayers requiring additional time to pay their taxes. However, with the Government facing an estimated deficit of over £300 billion this year, at a time when reduced incomes and profits allied with deferred tax payments have eroded tax receipts by almost 50%, the suspension is being lifted and tax officials, assisted by HMRC’s highly sophisticated Connect software, are beginning to contact taxpayers and their advisors regarding cases of suspected tax avoidance.
While most taxpayers are honest, that is no protection against becoming collateral damage in an HMRC campaign. It is for this reason that professional fee protection insurance is becoming popular.
How Tax Investigation Insurance Works
Tax is not optional and tax investigation insurance does not cover the amount owed to HMRC. It simply covers the professional fees associated with a HMRC enquiry. Suppose, for example, you get notified by HMRC that you or your business owes £7,500 in unpaid tax. You instruct your accountant to provide information and negotiate with HMRC on your behalf to reduce the demand. Let’s say the accountant’s fee for this time spent on your behalf comes to £1,500.
Without tax investigation insurance: In a best-case scenario where your accountant manages to get the tax bill reduced to £0, you will still have to pay the £1,500 accountant’s fee. In a worst-case scenario, where the negotiation is unsuccessful, you will owe HMRC £7,500 in addition to the £1,500 that you owe your accountant, a total cost of £9,000.
With tax investigation insurance: In the best-case scenario where your accountant manages to get the tax bill down to £0, your insurance will cover the accountant’s £1,500 fee so your total cost is £0. In the worst-case scenario, with insurance, you will still owe £7,500 to HMRC but the insurance will cover your accountant’s fee so your total cost is £7,500.
Tax Investigation Examples
In the past decade the number of enquiries undertaken by HMRC has increased significantly year on year. Any individual or business can be subject to an enquiry, even if their affairs are in order. Set out below are three examples of cases where tax investigation insurance fully covered the accountant’s fee.
High net worth individual: In this enquiry, HMRC wanted to check the individual’s domicile status. HMRC requested a great deal of information over a period of four years. The accountant assisted the individual throughout the enquiry. By the time agreement was reached with HMRC, the accountant’s fee was over £75,000.
Personal tax: Following a property sale, HMRC opened an enquiry into an individual’s Capital Gains Tax position, requesting property valuations, leases, and challenging the transaction which involved a business part-owned by a member of the individual’s family. While the enquiry was resolved relatively quickly, it entailed detailed correspondence. Fortunately, HMRC accepted that there was no additional tax to pay, however the accountant’s fee for the work involved in resolving the enquiry came to £3,500.
SME: In this example, a software company’s claim for a Research & Development Tax Credit was the subject of an HMRC enquiry. HMRC wanted to check the qualifying expenditure. The accountant provided detailed information and held a conference call with the investigating HMRC officer to explain the Research & Development claims. This enabled HMRC to close the enquiry with no adjustments. The accountant’s fee in this example came to £6,000.